The COVID-19 pandemic and its impact on the global economy has resulted in challenging times for businesses, which will continue in the weeks and potentially months ahead.
Key considerations for borrowers under their existing financing arrangements include, without limitation:
- Working capital / revolving credit facilities – lenders being able to stop making further advances;
- Market disruption – lenders being able to calculate interest on a different basis;
- Cross default – default under one facility automatically triggering an event of default under other facilities;
- Undertakings – lenders being able to request additional financial or operational information at any time;
- Financial covenants – a reduction in cash flow and operating income resulting in a potential default or event of default of facilities;
- Repayment – the borrower’s ability to meet scheduled loan payments;
- Events of default – a payment event of default could potentially be used as a trigger for the commencement of insolvency proceedings against the borrower;
- Material adverse change – if the business, operations, property, financial condition or prospects of the borrower have been adversely impacted, this could potentially trigger an event of default of the borrower’s financing arrangements; and
- Cessation of business – the suspension or cessation of the business or operations of the borrower may trigger an event of default.
Practical implications will also need to be considered when documenting new financings or amendments to existing financings, including, without limitation:
- the location of signatories;
- the ability for documents to be signed electronically or whether ‘wet ink’ signatures will be required; and
- registration of certain financing documents.
Our legal update, COVID-19: how borrowers can manage the impact on their financing arrangements, analyses all of the above points in further detail.
In these uncertain times, borrowers will need to be live to the impact of the pandemic on their existing funding arrangements and engage with lenders as early as possible in order to keep businesses viable as a going concern and to ensure that businesses are in the best position to return to normal post-pandemic.
On April 7, 2020